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Illinois Budget Problems

CHICAGO - Illinois' already strained balance sheet can't afford the new spending and debt proposed in Gov. Rod Blagojevich's $49.7 billion budget for the next fiscal year, a Chicago-based government watchdog group warned yesterday in announcing its opposition to the plan that relies on new general obligation, pension, and tobacco debt.

The Civic Federation of Chicago, a nonpartisan business-sponsored organization that monitors government spending, issued its critique of the proposed budget in a 62-page analysis yesterday. While it endorsed some proposals, the group offered a stinging assessment of the most high-profile measures such as a $16 billion pension bond issue, $1 billion in new business taxes, the partial leasing of the state lottery, and $1.9 billion in new spending on health care and education and for tax breaks.

"As the nation enters an economic downturn, the governor's proposed budget relies on an imprudent combination of hefty business tax hikes, a partial asset lease, and billions of dollars in new debt," the report reads. "These plans do not adequately address the grim fiscal reality facing the state of Illinois. We are concerned that in this budget the governor is not addressing critical long-term issues that are threatening the fiscal stability of the state of Illinois for generations to come."

State budget spokeswoman Kelly Quinn shot back that the federation's report "fails to recognize that there is a huge human aspect to what government does, especially when there is an economic downturn. We would like to hear the federation's ideas on how the state can really help people during the national economic downturn."

Some of the review's harshest criticism was leveled at the governor's proposal to issue $16 billion of debt. Illinois' $42 billion unfunded pension liability stands out as one its most daunting fiscal challenges - an assessment widely acknowledged by fiscal managers, rating agency analysts, and the federation.

To bring down the liability, Blagojevich wants to borrow $16 billion by selling general obligation pension bonds to bring the funded ratio up to 75% from its current level of 63%. The state's $10 billion 2003 pension bond issue brought the funded ratio up from 48%. The governor also wants to restructure the long-term amortization schedule to increase annual payments by $300 million, putting the system on track to reach a funded ratio by 2033 - 12 years earlier than the current plan - at an overall savings of $34 billion in contributions.

The federation strongly opposes the move because the plan lacks the same key reforms involving future benefits and employee and employer contributions attached to state legislation last year that authorized the Chicago Transit Authority's issuance of $2 billion to fund its pensions and a trust for its other post-employment health care benefits.

"The governor and General Assembly should follow the advice they gave the CTA and implement reforms to reduce the operating cost of Illinois' extraordinarily generous benefit plans before asking taxpayers to bail out state pensions by borrowing more money," federation president Laurence Msall said. "To date, the General Assembly has failed to act on needed pension reforms."

The group's apparent mistrust of state leaders to enact structural spending reforms that would put the state's fiscal house "in order" and address the pension liability and $24 billion unfunded OPEB liability prompted the federation to withdraw its past support for a 1% increase in the state income tax. The federation last year endorsed the increase to shore up the pension funds and provide more funds for education.

"Until Illinois political leaders dedicate themselves to putting the state's fiscal house in order, Illinois taxpayers and the Civic Federation will not have confidence that any new revenue will be spent effectively," the report reads.

The federation also opposes the governor's proposal to partially lease the Illinois Lottery - a move that is expected to raise at least $10 billion. About $7 billion from the lease would provide the state funds needed for a proposed $25 billion capital budget. The state would borrow another $3.8 billion, and local and federal matching funds would cover the rest. The federation's opposition stems not directly from the idea of leasing the lottery, but from the lack of public detail on projects the state would fund in a capital budget.

The group also is against the governor's proposal to securitize some asset, most likely its national tobacco settlement payments, to raise more than $1 billion to fund one-time child and business tax credits because it would eliminate a long-term revenue stream to cover a one-time expense.

"Illinois citizens deserve both an explanation of the infrastructure needs of the state and a concrete plan to address priorities before billions of dollars are appropriated for public projects. Legislators should demand a detailed capital improvement plan before they agree to approve such a dramatic transformation of the state lottery to fund capital appropriations," the report reads. The state has said it would release details before Sept. 1.

Negotiations are ongoing between the governor and lawmakers over how to fund a plan and it remains unclear despite bipartisan support for some capital budget as to whether an agreement can be reached this spring.

The federation recommended that lawmakers scrap the proposed budget in favor of a bare-bones spending plan for fiscal 2009 beginning July 1 that relies on current revenues and includes the more than $3 billion payment owed in fiscal 2009 to the pension system.

The federation did endorse some measures in the proposed budget, including a 3% across-the-board spending cut in non-priority areas, personnel cuts, the closing of certain tax loopholes, and the governor's proposal to use $500 million in surplus funds from various non-general fund accounts to help eliminate a $750 million deficit in the current fiscal 2008 budget.

The proposed budget includes an all-funds operating budget of $49.7 billion which is $1.9 billion more than the fiscal 2008 level. The general fund totals $28.9 billion. When including new and reauthorized capital spending the overall budget grows to $58 billion.

The state's $20 billion of general obligation bonds are rated Aa3 by Moody's Investors Service and AA by Fitch Ratings and Standard & Poor's. Fitch assigns a negative outlook.

The federation's criticisms echo the comments of some lawmakers on both sides of the political aisle, leading many to believe that no agreement on a budget for the coming fiscal year will be reached between the Democratic governor and the Democratic leadership of the Senate and House by the scheduled May 31 adjournment of the General Assembly.